Small firms getting key advice from 'shadow' directors
Boston — When times get tough, most people want help. Owners of small companies are no exception.
So with modest-size firms facing tough economic times, a growing number of small business owners are turning to outside advisers for help in planning long-term strategy and in tightening up day-to-day operations. Some small business owners are hiring individual advisers, while others are setting up panels of experts.
''More and more managers and owners of smaller companies are realizing they don't have the resources in house and must look outside,'' says Albert Pastino, a Deloitte, Haskins & Sells partner. Mr. Pastino runs the accounting firm's small business practice in New York City.
One way for a firm to get useful advice is to form a ''quasi'' board of directors. A quasi board is typically composed of four or five business experts who agree to meet periodically and advise the owner of a small business in return for a relatively modest fee.
''A number of companies have adopted (the quasi board concept),'' says Harold Fox, a business professor at Ball State University in Muncie, Ind. ''I am surprised how many companies do have it.'' Professor Fox notes, however, there are no precise statistics on the number of privately owned companies that have formed quasi boards.
Members of such boards do not have the formal legal responsibilities held by board members of publicly owned companies. And members of quasi boards cannot replace the company's chief executive, as members of formal boards can.
Still, executives who have formed such boards seem pleased with the results. Preparing periodic reports on the business for the board ''is an awful lot of work, but the results outweigh the trouble,'' says Richard Yohe, chief executive officer of Maco Coatings Inc., a Wheeling, Ill., industrial roofing company.
The forming of a five-member quasi board three years ago has ''tightened up our planning and organizational structure,'' Mr. Yohe says. The chief executive has also turned to board members for help in hiring a key new executive and in coping with personnel problems.
Yohe sought board members with experience in a variety of fields including planning, finance, marketing, manufacturing, and law. ''I designed the board so that the people would fit my needs and reinforce my weaknesses,'' he says.
Nevertheless, he says he made clear to board members at the outset that ''you will have no authority. You cannot fire me. But I promise you I will do what you say or give you a good reason why not.'' Yohe contends that unless board members feel they have an impact, they will quit.
One reason the quasi board is still relatively rare is that many small business executives are not willing to have anyone -- even a group of experienced but powerless advisers - look over their shoulders on a continuing basis.
''Most small business owners are a bit paranoid,'' says Steven Brandt, a professor at the Stanford University Graduate School of Business. ''They are not terribly receptive to other folks' opinions and guidance. The last thing they want is someone hanging around their neck.''
This attitude is one reason small business owners have stepped up their use of individual consultants who are given an annual retainer fee. Of course, owners of small companies have called in consultants in the past to deal with specific legal, accounting, or manufacturing problems.
But now small companies are using consultants to help plot the general direction the firm should go. ''In most of the cases I am familiar with, firms look toward a format in which some outsiders can review the general strategy and direction of the business,'' says Boris Yavitz, dean of the Columbia University Graduate School of Business.
''I think they realize they have been using consultants for very specific kinds of projects and typically not discussing the overall direction'' of the company, Mr. Yavitz says.
Typically, the strategy advisers hired by a small company do not come from high-priced, major corporate consulting concerns like McKinsey & Co. or the Boston Consulting Group. Instead they are often drawn from business schools.
''Most of the better business-school professors are fairly busy sprinkling wisdom around companies,'' quips Stanford professor Brandt. Academic consultants typically receive around $500 a day for their labors, says Yavitz.
Members of quasi boards typically receive from $500 to $1,000 for each day they meet. So with three or four meetings a year, each board member costs a small company owner $1,500 to $4,000. As a result of the fee structure, companies using quasi boards typically have sales of $1 million to $15 million. For a company with less than $1 million in sales, ''the token payment becomes too burdensonme,'' notes Mr. Fox.
While the costs of a quasi board may appear high, they pale in comparison with what publicly held corporations pay their directors. A study released Feb. 15 by the Conference Board reported that between 1979 and 1981, median compensation for nonemployee directors rose 30 percent in manufacturing companies, 37 percent in financial firms, and 33 percent in nonmanufacturing businesses.
The business research group reported that as a result of these increases, the median annual compensation per board member hit $25,000 in manufacturing concerns, $15,800 in financial companies, and $21,085 in other nonmanufacturing firms.
The people who are served on quasi boards are not primarily motivated by money. ''I doubt anyone does it for the dollars,'' says Pastino at Deloitte, Haskins.
A key appeal of a quasi board, adds Mr. Yavitz, ''is the feeling you will have more of an impact or influence in a small company than you would in a large company, where you are talking about being one out of a dozen or more members of the board.'' Checklist: the quasi board vs. a traditional board Function Quasi Conventional Accountable for corporate conduct No Yes Required to make public disclosures No Yes Review and approve major corporate Yes Yes objectives, policies, and budgets Monitor the company's financial structure and performance Yes Yes Evaluate performance of chief executive and key executives Yes Yes Ensure company compliance with all applicable laws No Yes Have or need director's liability insurance No Yes Appointment and tenure Appointed by Elected by owner who stockholders determines tenure for set term Source: Harvard Business Review